S&P downgrades more mortgage securities

Refinancing more difficult, exacerbating losses, rating agency warns

By

AlistairBarr

SAN FRANCISCO (MarketWatch) -- Standard & Poor's downgraded more mortgage-backed securities on Thursday and warned that defaults and delinquencies could be exacerbated by the increasing difficulty that some homeowners face refinancing unaffordable home loans.

The agency said it cut ratings on 418 classes of residential mortgage-backed securities backed by closed-end second-lien home loans issued between January 2005 and January 2007.

The downgrades come because S&P said losses on such mortgage-backed securities will "significantly" exceed anything that's happened before and its own expectations.

The securities were originally worth $3.8 billion and represent 6.1% of the roughly $62 billion of U.S. mortgage-backed securities backed by closed-end second-lien home loans that S&P rated between early 2005 and early 2007, the agency added.

S&P and rival Moody's Investors Service have downgraded hundreds of mortgage-backed securities this month, roiling credit markets and temporarily tripping up the stock market. The moves signaled that trouble in the subprime mortgage market, which caters to less-creditworthy home buyers, isn't subsiding any time soon. See full story.

Looser underwriting standards; pressure on home prices; speculation; the layering of several risks onto single borrowers; rising first-mortgage payments on home loans that had low introductory rates and dodgy data, have all combined to produced higher-than-expected losses on mortgage-backed securities tied to closed-end, second-lien home loans, S&P said on Thursday.

In the past, when home owners couldn't pay their mortgages, they were able to refinance into a more affordable loan. But tighter underwriting standards introduced this year, rising interest rates and falling home prices have made it more difficult to refinance.

"This will result in further delinquencies and defaults," S&P warned.

S&P also downgraded 93 tranches of 75 CDOs on Thursday. The CDOs invested in some of the residential mortgage-backed securities that S&P downgraded last week.

Those CDO ratings cuts also take into account S&P's changes to ratings on the 418 classes of residential mortgage-backed securities announced earlier on Thursday, the agency said.

More than 10 of the CDO tranches downgraded on Thursday were originally rated AAA.

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